Break Into Forex In 12 Steps

Getting Started

Learning to trade in the Forex market can seem like a daunting task when you're first starting out, but it is not impossible. Here we will cover the preliminary steps you need to take to find your footing.

Getting Started

Learning to trade in the Forex market can seem like a daunting task when you're first starting out, but it is not impossible. Here we will cover the preliminary steps you need to take to find your footing.

Yield Drives Return

In every Forex transaction, you are simultaneously buying one currency and selling another. Since every currency in the world is attached to an interest rate set by the central bank of that currency's country, you are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought. For example, assume that New Zealand has an interest rate of 8% (800 basis points) and that Japan has an interest rate of 0.5% (50 basis points). If you decide to go long NZD/JPY, you will earn 800 basis points in annualized interest, but have to pay 50 basis points, for a net return of 7.5% or 750 basis points.

Low Spreads Save Money

The difference between the price at which a currency can be purchased and the price at which it can be sold is called the spread. It is calculated in "pips," and this difference is how Forex brokers make their money, since they don't charge commission. In comparing brokers, you will find that the time spent shopping around is worth it, as the difference in spreads can by very large (read How To Pay Your Forex Broker).

Proper Tools = Success

Forex brokers offer many different trading platforms for their clients, just like brokers in other markets. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms. Brokers usually also provide technical and fundamental commentaries, economic calendars and other research.

Keep Leverage Options Open

Leverage is necessary in forex trading because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).

Avoid Shady Brokers

Sniping and hunting – or prematurely buying and selling near preset points – is used by shady brokers to increase profits. Of course, no broker will admit to committing these acts, and there is no blacklist or organization that reports such activity. Besides, when you are trading with borrowed money, your broker can buy or sell at its discretion, even if you had enough cash to cover. If your position takes a dive before rebounding to all-time highs, some brokers will liquidate your position on a margin call at the low. The only way to determine which brokers do this and which brokers don't is to talk to fellow traders.

Trade Without Emotion

Don't keep "mental" stop-loss points if you don't have the ability to execute them on time. Always set your stop-loss and take-profit orders to execute automatically, and don't change them unless absolutely necessary. That way, you won't make panicky moves in the heat of the trading moment that depart from your overall trading strategy.